Are there situations where having a trust is recommended?
Although I don’t subscribe to the position that everyone should have a trust, there are situations in which having one is probably going to make sense:
Dependents who will need financial assistance for years. If you have people who will be financially dependent on you for years, such as minor children, you will need to have a trust in place to provide them with ongoing oversight. You don’t necessarily need to set that trust up now. You can direct the creation of a trust in your will. Be aware, however, that doing it this way doesn’t help you avoid a probate. A probate will need to be opened to transfer the assets into the trust.
Special needs child. If you have a special needs child, that child might need financial oversight for his or her entire life. That child may also qualify for certain government benefits to help with their ongoing care. You can, however, inadvertently disqualify that child from receiving those benefits by leaving them a large amount of unrestricted cash. A “special needs trust” can provide you with a way to support that child without disqualifying him or her from receiving government assistance as well.
Blended family. If you leave money without restriction to a spouse and that spouse lives longer than you, he or she will ultimately get to determine what happens to assets that had been yours. Even if you have made wills together, there is nothing to prevent that spouse from changing his or her will after you die. This can be a problem if you have kids from a relationship with someone other than that spouse and you want to be sure those kids receive some of your estate. If you want to provide for a spouse, but also be sure that your kids receive some of your assets as well, you will need a trust. A typical arrangement is for the trust to provide for your spouse as long as he or she lives after you pass away, with whatever remains at the end of your spouse’s life going to your kids.
Kids who need oversight. While most of us assume that receiving a large inheritance would be a wonderful thing, it can be ruinous for some people. If you’re not sure that your kids will be able to handle receiving a large amount of unrestricted money, you can address your concerns by giving it to them in trust with specific instructions about when, and under what conditions, they can access it.
Disinheriting. If you’re planning to cut an heir out of your estate plan entirely and are concerned that he or she will respond with litigation, you can make his or her task much more difficult with a trust. When your assets pass through probate, a court case is opened, your assets become a matter of public record, and all potentially interested parties receive notification. Everything is in place for unhappy heirs to file an objection. When assets pass through a trust, however, no court case is opened. A disappointed heir has to file a lawsuit and convince a court they have standing to sue. They then have to hope that the court will allow them to broad enough discovery to figure out what they may have been entitled to receive.
Real estate in more than one state. If you own real estate in more than one state, and you hold the properties in your name, your personal representative is going to need to open a probate case in each state in which you own property to get that property transferred to your heirs. You can avoid that by holding the property in trust instead.
Non-citizen spouse. If you are not a US citizen, or if you are married to someone who is not a US citizen, there are special tax concerns that you can address with a trust. Specifically, while spouses can usually leave as much as they want to each other without incurring a tax bill, there are limits to how much you can give to a spouse who is not a citizen without having to pay tax. Although this tax cannot necessarily be avoided, it can at least be delayed until after the non-citizen spouse passes away with something called a Qualified Domestic Trust. There are specific rules that need to be followed with regard to who can serve as trustee for this type of trust to work.
Asset protection and tax avoidance. If you are in a profession or have a hobby that comes with a high litigation risk, putting your assets into a trust can help mitigate that risk. Trusts can also help you move assets out of your estate if you have enough for taxes to be a concern. Both of these situations, however, require special kinds of trusts to accomplish these goals.
Trusts can provide a lot of wonderful benefits for you and your family. But their flexibility can also make them difficult to deal with if you are not sure what you are doing. Even more so than wills, creation and management of a trust requires the assistance of competent legal counsel.